-13-
exercise price, the call premium is the amount, in excess of an
ESO’s intrinsic value, that a purchaser would be willing to pay
for the ESO. An ESO’s call premium is difficult to measure
because it, unlike the call premium of a publicly traded option,
cannot be valued daily based on market transactions. FASB
readily recognized that the IVM fails to measure adequately the
call premium relating to ESOs.9 Nevertheless, the IVM remained a
permissible accounting method during the years in issue.
Although the FVM was added as the preferred method in 1996, most
companies continued to use the IVM during the years in issue.
Pursuant to the FVM, a corporation must measure the amount
of the expense as equal to the fair value of the ESO on the grant
date and amortize such expense over the vesting period. Under
SFAS 123, fair value is measured using option pricing models that
consider the following six attributes of equity-based
instruments: (1) The exercise price, (2) the expected life of
the option, (3) the current price of the underlying stock, (4)
the expected price volatility of the underlying stock, (5)
expected dividends, and (6) the risk-free interest rate for the
expected life of the option.
The FVM utilizes option pricing models, such as the Black
9 FASB, in SFAS 123, stated: “Zero is not within the range
of reasonable estimates of the value of employee stock options at
the date they are granted, the date they vest, or at other dates
before they expire.”
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011